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APJEM
Arth Prabhand: A Journal of Economics and Management
Vol.2 Issue 7 July 2013, ISSN 2278-0629
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THE ROLE OF FDI IN ORGANIZED RETAIL SECTOR IN INDIA
DR. MADHUR RAJ JAIN*; MR. PARMOD KUMAR SINGHAL**;
MS. AASTHA GUPTA***
*Head & Faculty of Management,
Galaxy Global Group of Institutions,
Dinarpur, Ambala, India.
**Assistant Professor,
Faculty of Management,
Galaxy Global Group of Institutions,
Dinarpur, Ambala, India.
***Assistant Professor,
Department of Commerce,
Arya Kanya Mahavidyalya,
Shahabad, India.
ABSTRACT
In the past decade, the Indian marketplace has transformed dramatically. However from the
1950’s to the 80’s investments in various industries was a limit due to the low purchasing power
in the hands of the consumer and Governments policies favoring the small- scale sector. Today
we are using the services and products of MNCs. The all credit goes to Dr. Manmohan Singh,
Prime minister, who has started the LPG program in 1991. Indian market is one of the largest
markets with high purchasing power. India in 1997 allowed foreign direct investment (FDI) in
cash and carry wholesale. Then, it required government approval. The approval requirement was
relaxed, and automatic permission was granted in 2006. Between 2000 to 2010, Indian retail
attracted about $1.8 billion in foreign direct investment, representing a very small 1.5% of total
investment flow into India. There is lots of work to be done in the field of logistics & supply
chain management. It is not possible for Indian government alone to developed world class
infrastructure and other allied facilities because of huge investment requirement. FDI in India
has in a lot of ways enabled India to achieve a certain degree of financial stability, growth and
development. In order to create new & more jobs, FDI is the success mantra now. The further
step is again taken by Dr. Manmohan Singh in December, 2012 allowing the FDI in Retail sector
100% in single brand and 51% in multi brand business. This step will encourage the foreign big
and organized retailers like Cash and Carry, Wal-Marts in India. This step will be a success stone
in the economy of the India. FDI no doubt is creating innovation in retail sector but
simultaneously it may pull down the local and domestic retailers of India which is surely a
concern to worry about for Indian government. In this research we have just tried to bring down
maximum thoughts in lieu of FDI and form a constructive view over it.
KEYWORDS: FDI, Globalization, organized, MNCs, Investment, Retail.
______________________________________________________________________________
APJEM
Arth Prabhand: A Journal of Economics and Management
Vol.2 Issue 7 July 2013, ISSN 2278-0629
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INTRODUCTION
For Indian retailing, things started to change slowly in the 1980s, when India first began opening
its economy.
Textiles sector companies like Bombay Dyeing, Raymond's, S Kumar's and Grasim was the first
to see the emergence of retail chains and now these stores become the so much important in the
economy. Later on, Titan, maker of premium watches, successfully created an organized
retailing concept in India by establishing a series of elegant showrooms. For long, these
remained the only organized retailers, but the latter half of the 1990s saw a fresh wave of
entrants in the retailing business. This time around it was not the manufacturer looking for an
alternative sales channel. These were pure retailers with no serious plans of getting into
manufacturing. These entrants were in various fields, like – Food World, Subhiksha, Reliance
Fresh and Nilgiris in food and FMCG; Planet M, Easy Day, Mor, Big Bazar, SARAS, and
Music World in music; Crossword and Fountainhead in books; Pantaloons, Charlie, Wranglers,
Lee’s, Van Heusun, Peter England and so many retail stores in readymade cloths.
Now India is in the midst of a retail boom. The sector witnessed significant transformation in the
past decade from small-unorganized family-owned retail formats to organized retailing. Indian
business houses and manufacturers are setting up retail formats while real estate companies and
venture capitalist are investing in retail infrastructure. Many international brands have entered
the market. With the growth in organized retailing, unorganized retailers are fast changing their
business models. However, retailing is one of the few sectors where foreign direct investment
(FDI) is not allowed at present.
1.1 DEFINITION OF RETAIL
In 2004, The High Court of Delhi defined the term ‘retail’ as a sale for final consumption in
contrast to a sale for further sale or processing (i.e. wholesale). A sale to the ultimate consumer.
Thus, retailing can be said to be the interface between the producer and the individual consumer
buying for personal consumption. This excludes direct interface between the manufacturer and
institutional buyers such as the government and other bulk customers. Retailing is the last link
that connects the individual consumer with the manufacturing and distribution chain. A retailer is
involved in the act of selling goods to the individual consumer at a margin of profit.
1.2 DIVISION OF RETAIL INDUSTRY – ORGANIZED AND UNORGANIZED
RETAILING
The retail industry is mainly divided into: - 1) Organized and 2) Unorganized Retailing
Organised retailing refers to trading activities undertaken by licensed retailers, that is, those who
are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets
and retail chains, and also the privately owned large retail businesses.
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Arth Prabhand: A Journal of Economics and Management
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Unorganised retailing, on the other hand, refers to the traditional formats of low-cost retailing,
for example, the local kirana shops, owner manned general stores, paan/beedi shops,
convenience stores, hand cart and pavement vendors, etc.
The Indian retail sector is highly fragmented with 97 per cent of its business being run by the
unorganized retailers. The organized retail however is at a very nascent stage. The sector is the
largest source of employment after agriculture, and has deep penetration into rural India
generating more than 10 per cent of India’s GDP.
ENTRY OPTIONS FOR FOREIGN PLAYERS PRIOR TO FDI POLICY
Although prior to Jan 24, 2006, FDI was not authorized in retailing, most general players ha\d
been operating in the country. Some of entrance routes used by them have been discussed in
sum as below:-
1. FRANCHISE AGREEMENTS
It is an easiest track to come in the Indian market. In franchising and commission agents’
services, FDI (unless otherwise prohibited) is allowed with the approval of the Reserve Bank of
India (RBI) under the Foreign Exchange Management Act. This is a most usual mode for
entrance of quick food bondage opposite a world. Apart from quick food bondage identical to
Pizza Hut, players such as Lacoste, McDonald’s Burger, Mango, Nike as good as Marks as good
as Spencer, have entered Indian marketplace by this route.
2. CASH AND CARRY WHOLESALE TRADING
100% FDI is allowed in wholesale trading which involves building of a large distribution
infrastructure to assist local manufacturers. The wholesaler deals only with smaller retailers and
not Consumers. Metro AG of Germany was the first significant global player to enter India
through this route.
3. STRATEGIC LICENSING AGREEMENTS
Some foreign brands give exclusive licences and distribution rights to Indian companies.
Through these rights, Indian companies can either sell it through their own stores, or enter into
shop-in-shop arrangements or distribute the brands to franchisees. Mango, the Spanish apparel
brand has entered India through this route with an agreement with Piramyd, Mumbai, SPAR
entered into a similar agreement with Radhakrishna Foodlands Pvt. Ltd
4. MANUFACTURING AND WHOLLY OWNED SUBSIDIARIES.
The foreign brands such as Nike, Reebok, Adidas, etc. that have wholly-owned subsidiaries in
manufacturing are treated as Indian companies and are, therefore, allowed to do retail. These
companies have been authorised to sell products to Indian consumers by franchising, internal
distributors, existent Indian retailers, own outlets, etc. For instance, Nike entered through an
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Arth Prabhand: A Journal of Economics and Management
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exclusive licensing agreement with Sierra Enterprises but now has a wholly owned subsidiary,
Nike India Private Limited.
FDI IN SINGLE BRAND RETAIL
The Government has not categorically defined the meaning of “Single Brand” anywhere neither
in any of its circulars nor any notifications.
In single-brand retail, FDI up to 51 per cent is allowed, subject to Foreign Investment Promotion
Board (FIPB) approval and subject to that (a) only single brand products would be sold (i.e.,
retail of goods of multi-brand even if produced by the same manufacturer would not be allowed),
(b) products should be sold under the same brand internationally, (c) single-brand product retail
would only cover products which are branded during manufacturing and (d) any addition to
product categories to be sold under “single-brand” would require fresh approval from the
government.
While the phrase ‘single brand’ has not been defined, it implies that foreign companies would be
allowed to sell goods sold internationally under a ‘single brand’, viz., Reebok, Nokia, Adidas.
Retailing of goods of multiple brands, even if such products were produced by the same
manufacturer, would not be allowed.
Going a step further, we examine the concept of ‘single brand’ and the associated conditions:
FDI in ‘Single brand’ retail implies that a retail store with foreign investment can only sell one
brand. For example, if Adidas were to obtain permission to retail its flagship brand in India,
those retail outlets could only sell products under the Adidas brand and not the Reebok brand, for
which separate permission is required. If granted permission, Adidas could sell products under
the Reebok brand in separate outlets.
2. RESEARCH METHODOLOGY
The sheer potential of Retail sector and its contribution in Indian economy highlights the
relevance of this paper.
The objectives of paper are :
Advantages & Disadvantages of FDI in Retail.
Impact of FDI on various stakeholders.
Evaluate the effect of Organized Retail on the Unorganized Retail.
3. MATERIAL AND METHOD
The study is based on different literatures, Case studies and analysis of organized retail market.
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3.1 GLOBAL RETAILING SCENARIO:
Retail has played a major role in improving the productivity of the whole economy at large. The
positive impact of organized retailing could be seen in USA, UK, and Mexico and also in China.
Retail is the second largest industry in US. It is also one of the largest employment generators.
It is also important to understand that Argentina, China, Brazil, Chile, Indonesia, Malaysia,
Russia, Singapore and Thailand have allowed 100% FDI in multi brand retail. These countries
benefited immensely from it. Also small retailers co-exist. The quality of the services has
increased.
China permitted FDI in retail in 1992 and has seen huge investment flowing into the sector. It
has not affected the small or domestic retail chains on the contrary small retailers have increased
since 2004 from 1.9 million to over 2.5 million.
Take for example Indonesia where still 90% of the business still remains in the hand of small
traders.
3.2. INDIAN RETAILING TRENDS
The retail industry in India is of late often being hailed as one of the sunrise sectors in the
economy. AT Kearney, the well-known international management consultancy, recently
identified India as the second most attractive retail destination globally from among thirty
emergent markets. It has made India the cause of a good deal of excitement and the cynosure of
many foreign eyes. With a contribution of 14% to the national GDP and employing 7% of the
total workforce (only agriculture employs more) in the country, the retail industry is definitely
one of the pillars of the Indian economy.
Modern retail formats - The growth of western-style malls is changing the way urban
consumers shop.
We're seeing many bigger box, value based formats setting up shop. The size of these stores is
about 50,000 square feet, a departure from the smaller mom & pop-type store that dominates the
local retail landscape.
Shoppers' Stop - department store format.
Westside - emulated the Marks & Spencer model of 100 per cent private label, very good
value for money merchandise for the entire family.
Giant and Big Bazaar, SARAS, - hypermarket/cash & carry store.
Food World and Nilgiris – supermarket format.
Pantaloons and The Home Store - specialty retailing.
Tanishq has very successfully pioneered a very high quality organized retail business in fine
jewellery.
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A new entrant in the retail environment is the 'discounter' format. It is also is known as cash and-
carry or hypermarket. These formats usually work on bulk buying and bulk selling. Shopping
experience in terms of ambience or the service is not the mainstay here.
3.3. FDI in Retail Industry
FDI in retail industry means that foreign companies in certain categories can sell products
through their own retail shop in the country. At present, foreign direct investment (FDI) in pure
retailing is not permitted under Indian law. Government of India has allowed FDI in retail of
specific brand of products. Following this, foreign companies in certain categories can sell
products through their own retail shops in the country. India’s retail industry is estimated to be
worth approximately US$411.28 billion and is still growing, expected to reach US$804.06
billion in 2015. As part of the economic liberalization process set in place by the Industrial
Policy of 1991, the Indian government has opened the retail sector to FDI slowly through a series
of steps:
1995 : World Trade Organization’s General Agreement on Trade in Services, Which includes
both wholesale and retailing services, came into effect.
1997 : FDI in cash and carry (wholesale) with 100% rights allowed under the government
approval route.
2006 : FDI in cash and carry (wholesale) brought under the automatic route. Up to 51 percent
investment in a single-brand retail outlet permitted.
2011 : 100% FDI in single brand retail permitted.
The Indian government removed the 51 percent cap on FDI into single-brand retail outlets in
December 2011, and opened the market fully to foreign investors by permitting 100 percent
foreign investment in this area.
Government has also made some, albeit limited, progress in allowing multi-brand retailing,
which has so far been prohibited in India. At present, this is restricted to 49 percent foreign
equity participation. The specter of large supermarket brands displacing traditional Indian mom-
and-pop stores is a hot political issue in India, and the progress and development of the newly
liberalized single-brand retail industry will be watched with some keen eyes as concerns further
possible liberalization in the multi-brand sector. In this Paper, Authors discusses the policy
developments for FDI in these two organized retail sector.
3.4. FDI IN “SINGLE-BRAND” RETAIL
While the precise meaning of single-brand retail has not been clearly defined in any Indian
government circular or notification, single-brand retail generally refers to the selling of goods
under a single brand name. Up to 100 percent FDI is permissible in single-brand retail, subject to
the Foreign Investment Promotion Board (FIPB) sanctions and conditions mentioned in Press
Note 3[8]. These conditions stipulate that:
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Only single-brand products are sold (i.e. sale of multi-brand goods is not allowed, even if
produced by the same manufacturer).Products are sold under the same brand internationally
Single-brand products include only those identified during manufacturing
Any additional product categories to be sold under single-brand retail must first receive
additional government approval FDI in single-brand retail implies that a retail store with foreign
investment can only sell one brand. For example, if Adidas were to obtain permission to retail its
flagship brand in India, those retail outlets could only sell products under the Adidas brand. For
Adidas to sell products under the Reebok brand, which it owns, separate government permission
is required and (if permission is granted) Reebok products must then be sold in separate retail
outlets.
3.5. FDI IN “MULTI-BRAND” RETAIL
While the government of India has also not clearly defined the term “multi-brand retail,” FDI in
multi-brand retail generally refers to selling multiple brands under one roof. Currently, this
sector is limited to a maximum of 51 percent foreign equity participation.
These are positive step and it will encourage international brands to set up shop in India. On the
other hand, this will also lead to competition among Indian players. It will be the consumers who
stand to gain,'' This would not change the market dynamics immediately as it will take some time
for these plans to fructify. The growing dominance of multinational companies in the country's
$200 billion retail business, had warned that any move to increase FDI in the retail sector would
ruin the business of small and medium traders scattered over the country. Organized retailers in
India are opposing the entry of MNCs in retail trading because of their predatory pricing strategy
that wipes out competition, when the Government decides to allow foreign players to enter the
retail space, it should first restrict them to lifestyle products segment before permitting them to
spread their wings into other areas like grocery marketing that has a direct impact on `kirana
stores'.
FDI in retail trade has forced the wholesalers and food processors to improve, raised exports, and
triggered growth by outsourcing supplies domestically. The availability of standardized products
has also boosted tourism in these countries. FDI in retail sector has been a key driver of
productivity growth in Brazil, Poland and Thailand. This has resulted in lower prices to the
consumer, more consumption and higher profit for the producer.
4. FOREIGN DIRECT INVESTMENT - IMPACT AND ANALYSIS
Market liberalization, a growing middle-class, and increasingly assertive consumers are sowing
the seeds for a retail transformation that will bring more Indian and multinational players on the
scene. The big Indian retail players looking to expand their operations include Shopper's Stop,
Pantaloon, Reliance, Lifestyle, Food World, Vivek's, Nilgiris, Ebony, Crosswords, Globus,
Barista, Café Coffee Day, Wills Lifestyle, Raymond, Titan, Bata and Westside. Well-established
business houses such as Wadia, Godrej, Tata, Hero, etc., are drawing up plans to enter the fast-
growing organized retail market in India. The international players currently in India include
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McDonald's, Pizza Hut, Dominos, Levis, Lee, Nike, Adidas, TGIF, Benetton, Swarovski, Sony,
Sharp, Kodak, and the Medicine Shoppe. Global players are entering India indirectly, via the
licensee/franchisee route, since Foreign Direct Investment (FDI) is not allowed in the sector.
Despite all these developments, the organized retail business still comprises a small proportion of
the total size of the Rs 9,00,00-crore ($200 billion) retail sector. Retail business is growing at 5-6
per cent per annum. The size of organized retailing was estimated around Rs 26,000 crore in
2004, about three per cent of the total.
However, it is now set to grow at 25-30 per cent per annum. In developed countries, organized
retailing makes for over 70 per cent of the total business.
Recently, the Government announced its intention to open up the retail sector to foreign
investment. It is still, however, debating whether to allow 26 per cent or 49 per cent FDI in the
sector. Initially, the idea was to begin with 26 per cent and then gradually liberalize it further.
However, since China moved from 49 per cent to 100 per cent FDI in this sector last year, the
Commerce Ministry and the Prime Minister's Office (PMO) appear to be inclined to go for 51
per cent FDI at one go, despite opposition from Left parties.
Even as the government is debating the level FDI in of retail, a number of foreign players,
including the world's largest corporation, the $288- billion Wal-Mart Stores, Inc., have
announced their intention to enter India in a big way. With the impending opening up of the
sector to overseas investment, they are now keen on forays into the sector in partnership with
multinational chains. According to industry analysts, as many as 20 big Indian companies are
working on plans to enter the sector in partnership with foreign investors.
Despite all these favourable developments, the Government appears to be still dithering in giving
a green signal to FDI in this sector in view of the opposition from Left parties. It is indeed
unfortunate that this issue is hanging fire for nearly four years now, even as the government has
allowed foreign investment in a number of sectors including banking, telecom and insurance.
As of now, the Indian retail sector, largely due to its fragmented structure, suffers from limited
access to capital, labour and suitable real estate options. In contrast, China, which allowed 49 per
cent FDI in the retail sector since 1992, benefited immensely with foreign players bringing
capital and new technologies and growing export market for domestic products. At present,
around 40 foreign retail players account for almost 20 per cent of the organized retailing in that
country. India is tipped as the second largest retail market after China, and the total size of the
Indian retail industry is expected to touch the $300 billion mark in the next five years from the
current $200 billion. The size of organized retailing is expected to touch $30 billion by 2010 or
approximately 10 per cent of the total. Various retailers from across the word have been visiting
India over the past few months with a view to establishing their presence in a market that is
expected to witness exiting developments.
On the contrary, the opening up of the sector to FDI will lead new economic opportunities and
there will be more employment generation. According to a policy paper prepared by the
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Department of Industrial Policy and Promotion (DIPP), FDI in retail must result in backward
linkages of production and manufacturing and spur domestic retailing as well as exports.
The opening up of retail to FDI should be designed in a such as way that many sectors -
including agriculture, food processing, manufacturing, packaging and logistics -reap benefits. It
is understood that the multinationals that invest in retail business in India would also source
Indian goods for their international outlets in a big way and thus provide a boost to Indian
exports. Indian retail chains would get integrated with global supply chains since FDI will bring
in technology, quality standards and marketing.
According to the World Bank, opening the retail sector to FDI would be beneficial for India in
terms of price and availability of products. Experience everywhere has shown that organized
retailing tends to have a major controlling effect on inflation because large organized retailers are
able to buy directly from producers at most competitive prices. The scale of operation and
technology help organized retailers score over the unorganized players, giving the consumers
both cost and service advantages.
Government has opened up the real estate sector by allowing 100 per cent FDI in the
construction projects. The move is expected to attract foreign funds and new technology into the
market. Second, Foreign Trade Policy 2005-06 has extended the benefit of the export promotion
capital goods (EPCG) scheme to the real estate sector. This is expected to tremendously boost
the organized retail sector by enabling it to create better and modern infrastructure. Also, the
extension of concessional duty scheme for import of capital goods by retailers with minimum
area of 1,000 square metres and implementation of VAT will significantly help organized
retailing.
5. ADVANTAGES OF FDI IN RETAIL
5.1. OPPORTUNITIES GALORE
While it is important not to lose sight of the local “Mom and Pop” shops, there is a distinct
opportunity for FDI in multi-brand retail. At the present moment, Indian companies are
exporting different types of products to numerous retailers across the globe. There is a large
segment of the population which feels that there is a difference in the quality of the products sold
to foreign retailers and the same products sold in the Indian market.
In view of the availability of higher disposable incomes for Indians, there is an increasing
tendency to pay for quality and ease and access to a “one-stop shop” which will have a wide
range of different products.
If the market is opened, then the pricing could also change and the monopoly of certain domestic
Indian companies will be challenged. In the eventual analysis, the consumers will benefit in the
form of potential lower prices due to enhanced and, possibly, tough competition in the market.
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5.2. BENEFITS FOR THE FARMERS
Presumably, with the onset of multi-brand retail, the food and packaging industry will also get an
impetus.
Though India is the second largest producer of fruits and vegetables, it has a very limited
integrated cold-chain infrastructure. Lack of adequate storage facilities causes heavy losses to
farmers, in terms of wastage in quality and quantity of produce in general, and of fruits and
vegetables in particular. Farmers in India get only 10%-12% of the price the consumer pays for
the agri-products. Coming of organized retailing will benefit farmers in big way. Big retailers
sell their product at very competitive prices. So, they source it directly from the farmers. Middle
man does not have any place in this format of retailing. This will not only benefit farmers but
also help in checking the food inflation.
Also India has very inadequate facilities to store the food grains and vegetables. As the
investment will flow into back end infrastructure, supply chain will get strengthened. Storage is a
major problem area and 20%-25% of the agri products get wasted due to improper storage.
PRODUCT WASTAGE
TOMATOES 35%
MANGOES 30%
POTATOES 25%
With liberalization, there could be a complete overhaul of the currently fragmented supply chain
infrastructure. Extensive backward integration by multinational retailers, coupled with their
technical and operational expertise, can hopefully remedy such structural flaws. Also, farmers
can benefit with the “farm-to fork” ventures with retailers which helps (i) to cut down
intermediaries ; (ii) give better prices to farmers, and (iii) provide stability and economics of
scale which will benefit, in the ultimate analysis, both the farmers and consumers.
5.3. IMPROVED TECHNOLOGY AND LOGISTICS
Improved technology in the sphere of processing, grading, handling and packaging of goods and
further technical developments in areas like electronic weighing, billing, barcode scanning etc.
could be a direct consequence of foreign companies opening retail shops in India,. Further,
transportation facilities can get a boost, in the form of increased number of refrigerated vans and
precooling chambers which can help bring down wastage of goods.
5.4. IMPACT ON REAL-ESTATE DEVELOPMENT
Retail is closely dependant on real estate as any retailer will require substantial spaces for setting
up business. Real estate in India has gone through a revamp due to the demand of high-end retail
malls and people’s changing perception towards an enjoyable shopping experience. Thus real
estate can get a further facelift in India and receive more investment with the opening up of FDI
in multi-brand retail.
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6. DISADVANTAGES OF FDI IN RETAIL
Opponents of the FDI feel that liberalization would jeopardize the unorganized retail sector and
would adversely affect the small retailers, farmers and consumers and give rise to monopolies of
large corporate houses which can adversely affect the pricing and availability of goods. They
also contend that the retail sector in India is one of the major employment providers and
permitting FDI in this sector can displace the unorganized retailers leading to loss of livelihood.
Nevertheless much said about good things that FDI in retail will bring but argument will not be
justified if we do not take into account the grey areas. Some of the grey areas are:
Predatory pricing could strangulate the domestic retailers.
It has been seen MNCs retailers uses there big size to kill competitors.
In order to bring goods at lowest possible price for customers they squeeze the margins of their
suppliers. So as claimed by thousand that suppliers will benefit, it still doubted.
In order to correct these anomalies, India need to have strong regulator for the sector. And at the
same time strengthen the Competition Commission of India before these Big Retailers prowls
into the Indian Territory.
1. The entry of large global retailers such as Wal-Mart would kill local shops and millions of
jobs.
2. The global retailers would collude and exercise monopolistic power to raise prices and
monopolistic (big buying) power to reduce the prices received by the suppliers.
Hence, both the consumers and the suppliers would lose, while the profit margins of such retail
chains would go up.
3. It would lead to lopsided growth in cities, causing discontent and social tension elsewhere.
However, these arguments can be overruled in the light of the ICRIER study conducted in India
in 2008, which showed that although unorganized retail suffered initially with the opening up of
organized retail in their vicinity, this effect significantly weakened over time. The rate of closure
of unorganized retail shops in gross terms was found to be 4.2 % per annum, which was much
lower than the international rate of closure of small businesses. Similarly, the rate of closure on
account of competition from organized retail was found to still lower, at 1.7 per cent per annum.
This was achieved through competitive response from traditional retailers and through improved
business practices and technology up gradation.
However, the development of organized retail has the potential of generating employment for
both the skilled and unskilled sections of the population. The Government can protect small
retailers by restricting FDI to be permitted only for stores having floor size greater than, say,
2,000 square feet. Moreover, monopolies of large corporate houses can also be controlled by the
Government by enforcement of strict regulations and, where needed, through the Competition
Commission of India which is empowered to evaluate abuse of dominant position.
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Arth Prabhand: A Journal of Economics and Management
Vol.2 Issue 7 July 2013, ISSN 2278-0629
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The foreign direct investment (FDI) in the Indian retail sector should be allowed in a phased
manner so that it could serve the purpose of much-needed capital and bring boom in the sector,
according to Confederation of Indian Industry (CII) Chairman Kishore Biyani.
1. FDI should be gradually allowed first in relatively less sensitive sectors like garments, lifestyle
products, house ware and entertainment."
2. Alternative funding mechanisms and investment opportunities should be considered like FIIs
and venture capital in the primary market, besides FDI. Hence they should be legalized and
encouraged in the primary market.
3. Industry needs time for capital formation, which would take at least two-three years.
The gradual inflow of FDI should not be a hindrance for the growth of the retail sector.
GOALS
1. To serve the purpose of much needed capital and bring a boom in this sector.
2. To enhance the backend infrastructure.
7. WHETHER FDI IN RETAIL SHOULD BE ALLOWED IN INDIA?
Three arguments are generally extended against allowing FDI in the retail sector. First, this will
prevent the growth of domestic organized retail industry. Second, it will result in closure of small
retail stores, the so-called mom-and-pop stores and third, that it will disrupt the social
community and the given way of life. The first argument is passes simply because with the entry
of Reliance, Tatas and other large domestic players the domestic retail industry has surely come
of age. These corporate don’t need protection. Actually, if these infants are protected any longer
they have good chances of becoming delinquent adults. Soon enough, monopoly rents will begin
to accrue and bad habits will get entrenched and it will then be more difficult to open the sector.
Domestic players have the best locations anyway and a clear head start. The equity argument
does not have solid empirical basis. As the ICRIER study on the same subject has shown,
liberalization of retail raises overall economic welfare and does not result in loss of employment.
Some restructuring will take place but local markets will not close down. As the entry of
Haldiram has not led to the demise of Nathus and Agarwal mishthan bhandars. Both can coexist
as they fulfill different needs and serve different clientele. Organized retailing generates
additionality of demand by reducing costs, lowering prices and also improves returns to
producers by eliminating unnecessary intermediaries. The third argument has greater substance.
Malls could lead to greater urban anonymity and a complete break down of the bazaar culture
and the disappearance of the ‘down town’ space that has its own charm. But in France, Germany,
the Nordic countries and also other parts of Europe, experience has shown that local
communities can thrive if they are empowered and involved in urban planning. Organized retail
does not necessarily result in the dreaded mid-west. So FDI in retail improves growth prospects,
does not harm equity and discourages monopoly rents and therefore should be allowed.
APJEM
Arth Prabhand: A Journal of Economics and Management
Vol.2 Issue 7 July 2013, ISSN 2278-0629
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8. CURRENT REGULATORY FRAMEWORK
The regulatory regime for the existing homegrown retailers is quite exhaustive with as many as
40 licenses and permissions required to be obtained by the retailer from diverse authorities,
depending on the nature of activity.
For example, a multi-brand retailer selling food and perishable items has to have a prevention of
food adulteration license under the Prevention of Food Adulteration Act, a weights & measures
license under Weights & Measures Act for regulating the weights and measures and labels on the
food products sold, along with an agricultural produce marketing committee license under the
Agricultural Produce Marketing Committee Act for selling fruits and vegetables. If a retailer
decides to launch a store in more than one state then the number of licenses will multiply
accordingly. Therefore, an entity establishing retail stores across India will have to face
enormous licensing obligations in each state of operation. This too acts as a deterrent. As the
government has opens up the sector to FDI, in addition to the regular operating licenses, chances
are that the foreign multi-brand retailers will have to seek investment approvals as well from the
central regulator which, at present, is the Foreign Investment Promotion Board. With the passage
of time, the expectation would be that the multitude licenses across different states would be
reduced and homogenized.
9. FUTURE SCOPE
The sentiment towards 100 percent FDI in retail sector is gathering pace. Currently, the UPA has
a majority in the house and it seems quite possible that they will be able to pass the bill, making
FDI in multi-brand retailing, a reality. Moreover, with state governments like Punjab working
with modern retailers in furthering improvement of trade, there is a possibility that support will
flow in from other state governments as well.
However, the opposition led by the BJP is not in favour of this move and has presented a report
recently to the Parliament recommending a complete ban on FDI in retail.
The proposed FDI norms will open up strategic investment opportunity for global retailers, who
have been waiting to invest in India. This may have a significant impact on the current
arrangement of foreign players.
This policy will require investment from retailers in areas of supply chain, especially for
perishable products, thus helping farmers to get better income leading to an inclusive growth in
the country. Given the large number of SKU’s that retailers stock Small and Medium Enterprises
(SME) sector is also set to gain from this move due to preference given by retailers to private
label brands. The move will also encourage smaller suppliers to take their products to a national
platform that they could not previously manage due to lack of an organised supply chain of their
own. This policy will also open up avenues for attracting, developing and retaining talent.
Contract manufacturers would also benefit from these policy changes. With the global economy
still recovering, investment in India is lucrative to a retailer attributable to strong consumerism,
APJEM
Arth Prabhand: A Journal of Economics and Management
Vol.2 Issue 7 July 2013, ISSN 2278-0629
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rising disposable income, growing middle class population, favorable macro and micro economic
indicators supplemented by a stable government.
10. CONCLUSION
In the final analysis, for India, FDI in multi-brand retail should be seriously considered by the
government and, as with many other sensitive sectors; a gradual opening up could be made
possible. Despite country wide speculation on the plight of various Stakeholders, trading
associations, politicians, etc. have given various arguments for and against FDI in retailing.
However, such arguments are largely based on perception and there has not been serious
academic research in this area.
India needs to take a lesson from China where organized and unorganized retail seem to co-exist
and grow together. Further, India’s local enterprises will potentially receive an up gradation with
the import of advanced technological and logistics management expertise from the foreign
entities.
In our view, the government has an opportunity to utilize the liberalization for achieving certain
of its own targets:
improve its infrastructure;
access sophisticated technologies;
generate employment for those keen to work in this sector
FDI would lead to a more comprehensive integration of India into the worldwide market and, as
such, it is imperative for the government to promote this sector for the overall economic
development and social welfare of the country. If done in the right manner, it can prove to be a
boon and not a curse.
REFERENCES
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Gupta, Ashulekha, “Trends in FDI inflows to India after Liberalization”, “Pragyaan: Journal of
Management of IMS Dheradun”, Vol.-9, issue-2, December-2011.
ICRIER study, “Impact of Organized Retailing on the Unorganized Sector” May 2008,
fromhttp://siadipp.nic.in/policy/icrier_report_27052008.pdf
APJEM
Arth Prabhand: A Journal of Economics and Management
Vol.2 Issue 7 July 2013, ISSN 2278-0629
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